How to sell a property using Owner Financing

8 Replies

Hello everyone, hope all is well,

I plan to sell a property using Owner Financing and need/want to learn the ins and outs of this strategy. I have searched online for information and I'm asking if anyone has good information they can share, any online courses, or seminars I can look into or any links. 

Thank you

I've sold about 45-50 properties this way, mostly successfully. I started doing this when the federal government changed the rules about selling on contracts for deed. This was a result of the "Whitewater (non) Scandal". My attorney told me that because of this, and the fact that we were in Texas to just sell my properties with a Warranty Deed, Deed of Trust, Note and HUD-1. I still had a couple of places with underlying FHA or VA assumable loans on them but for the most part I was dealing with flips that I owned outright.

1. You can get a higher than market price with seller financing. If you do it right.

2 I NEVER had anyone try to negotiate a lower price, in fact most people didn't even know the price until we were signing the purchase agreement. I had a couple of people ask for lower down payments and the two or 3 times I did that I just raised their interest rate (it was only in my head at that point) when filling out the paperwork.

3. You can get a higher than market interest rate.

4. You can goose your income (IF YOU KNOW WHAT YOU'RE DOING) by preparing the documents yourself and then charging the usual and customary fee for DOCUMENT PREPARATION on the HUD-1.

5. I usually got a good number of calls because my ads read; "By owner, 3/2/2 in XYZ neighborhood. Owner will finance with $5,000 down."

The people that answer this ad noticed one big thing; $5,000 down, in the ad. They've never talked to an agent that said anything about getting into a house for $5,000. Like unsophisticated buyers that walk into a car dealer and ask "what kind of payment on that new hupmobile" these people are PAYMENT buyers. IOW, not financial sophisticates.

One of the more expensive houses I sold this way was in Houston in 1998. It was a 1900 sq. ft. 3/2/2 in a country club community. We had owned it for 19 years, 10 years as primary 9 years as a rental-BTW, only 2 tenants in 9 years! I asked my broker neighbor what she thought the market was. She told me to ask $105,900,  but to take anything over $100K. The second couple that looked at it wanted it. I told them it was $120,000. They paid the down and I charged them $400 for document preparation and things went along OK.

Here's the downside on seller financing. After a couple of years they left, I think he was in jail and when I served her notice she moved out that weekend. Because service on him was a problem it took a bit longer than usual and the foreclosure cost more than it should have (don't hire a friend for legal work!). I got it back. The carpet was shot enough that I replaced it, repainted the interior and was getting ready to re-sell when I noticed what looked like I might have had a roof leak. I got a bit of money from insurance and replaced the roof.

When I called the broker she said the market had improved and to ask $120K. I ran the same ad and sold it to the first couple that looked for $135,000. They refinanced about 5 years later.

I guess my advice would be to make sure you're entirely conversant with a legal sales contract for your state as well as the warranty deed, deed of trust, note and HUD 1 process. Where each number comes from, how to derive numbers etc.

Good luck

In my experience, you can do it profitably as above noted, but it depends if you want to deal with those types of Buyers. You're likely keeping the property either via foreclosure or from owners walking away...

There is a lot to consider when selling a property in Texas under owner financing, far too much much to be discussed in any detail in this forum. You would be wise to seek a competent real estate attorney to advise you on the first few you do so you'll begin to understand the benefits and risks of such a strategy. 

There are people who teach what @Frank Adams suggests, but as a lawyer in Texas, I have sued investors that did just that.

1. Above market price: Sure, you can get a small premium, but that should have nothing to do with owner financing.  If you sell at 5-10%+ over market, that looks like FRAUD.  If the seller is putting down cash and the note is full market, in 5-7 years when they want to sell they won't be able to and you will be stuck with a borrower who will take out their resentment on the property before you get it back.

2. Meh.

3. Interest rate: This is where you adjust the terms for higher risk to the lender, not sales price.  Keep in mind that if the interest rates push higher than 8.5-8.75%, appraisal and inspection are no longer optional under Dodd-Frank and CFPB guidelines.  See you in Federal Court.

4. If the seller is an entity (LLC, trust, Inc., etc.), you cannot charge to draft docs. That's the Unauthorized Practice of Law - a criminal violation in every jurisdiction.  Officers of entities can draft for their company or entity (mostly), but still cannot charge this to others.

Close at a title company.

Use a licensed attorney to do legal work.

Jerel Ehlert took issue with my points regarding seller financing, so I thought I'd reply. Would have done this yesterday but spent the day getting CT scans and talking with my Oncologist.

1. His statement that "above market price could look like fraud" seems a bit strange. If I call 4 local agents to give me an FMV on my current residence I have little doubt that their numbers could easily vary by 5-7%. True MARKET VALUE isn't determined until a "willing buyer and a willing seller, without duress, come to terms". If I tell the buyer the price is $75,000 why would anyone think it's not that price? In neither Houston nor the Hill Country town where we lived was a 5-10% appreciation over 5-7 years an unreasonable expectation.

2. I'm not sure which part of my statement the "meh" refers to, but since he addresses the interest in #3 I'll guess he means the part of people just paying my price. Going back and looking at my 2003 records, a typical year and the last year that I sold a flip, the average mortgage in my portfolio was on the 12 properties that had sold for an average price of about $75,000. If people met my price ($900,000) instead of negotiating a 5% reduction that's $45,000 that I didn't forgo. Meh indeed!

3. I did these deals between 1994 and 2003 so neither Dodd-Frank nor the CFBP would have been applicable. 

4. OK, I wasn't an entity but an individual. If that is the case how come when I bought REOs or from the VA or the RTC I paid for drafting of documents? In all cases I was using the Texas Association of Realtors (TAR) promulgated purchase and sales agreement, which I filled in, just as an agent would. I don't see where that can be construed as "legal work". In several of these cases I closed at title companies, who accepted my Deed, Deed of Trust and Note with and paid the charge that I assessed with no complaint.

I was always surprised that their attorney wasn't upset about being jobbed out of a nice fee for virtually no work. (I know it's not really "no work" but let's face it, those documents are in their computers in template form just waiting for a clerk to fill in the numbers and an attorney to spend less than 15 minutes reviewing said work. I think I'm being generous in saying 15 minutes to review the work based on the closings at title companies I've shown up for only to find mistakes in the documents!)

In the case where I filled in the blanks on the Deed, Deed of Trust, Note and HUD-1 was I doing "legal work". I've had in person conversations about this with 4 or 5 different Texas attorneys and they all agreed that I wasn't. I realize you're a Texas attorney with a different opinion but that's what our legal system is based on.

I just noticed that Ronald Rohde also commented on the possible downside of doing seller financing in the way I described. He is ABSOLUTELY CORRECT. On my more moderately priced homes I knew I faced that same risks as I had when renting those homes, slow pays, no pays and the possibility of getting them back. I knew that was  risk I was taking and factored that risk into my rental and sales approach.

I sold 45-50 properties this way, including one higher priced one that I mentioned above. Of those I got these back.

$65,000 house in Houston western suburbs. Amazingly this had not been a good rental either. We had 3 other rentals, which we then sold on seller financing, in the same subdivision and this was the only one that was a problem. After I convinced the buyers that their best option was in signing a WD back to me it only took me a day or so to get the house ready for the market. An agent I knew lived down the street and she said she thought the house didn't have good curb appeal and suggested I invest in a few shrubs and mulch. I did that and re-sold it about 3 weeks after I got it back.

2. The country club house I mentioned above.

3. Texas Hill Country house. Purchased for $44,000 in 2002. Seller had to replace some pipes and we painted the interior and exterior. Closed on the purchase and sale the same day. Sales price was $65,000. Four years in and the buyers got divorced, he left and she couldn't swing the payment on her own. Before I could do anything her mother called and asked if she could make the payment because she thought the house was a good asset. Three years later the original wife moved back to town with her new husband, the kid she had left with and his two kids. This was an 800 square foot 2/1. In 2013 she called and said they had found a new place but that the agent they had contacted about listing the house told them they'd have to do some serious work before listing it. They had run a poorly done wall to split the living room into two bedrooms and the house was a mess. We were living in Colorado by this time but went back for a week, got a contractor buddy to bring things up to snuff, changed out some floors and did a few other things. This cost us about $6,000 but we listed it and sold it in about 60 days.

Another one in the adjoining town. Purchased for $50,000 with it needing a roof and not much else. Put the roof on in my spare time and sold it for $75,000. They split up 2 years later and she couldn't swing the payment. Meantime the insurance had sent a check for about $5,000 for hail damage to the roof. When she sent it to me for my signature as the lender I refused to do so until I had inspected the roof, but I drove down there the day I called her about that. Her stuff was mostly packed so I told her if she was out in 3 days, which she looked ready to be gone that day, I wouldn't call the DA about fraud charges. I foreclosed, listed it and sold it about 6 weeks later for $63,000. The price drop was between 2007 when I bought and sold it, and February 2011 when I sold it. A lot of the country suffered similar declines in that time frame.

There was another one that I sold and got back 3 times, it probably would have been a terrible rental. I ended up with about a $5,000 net loss over the years on it, But about a $45,000 long term capital loss due to a quirk in the tax laws.

Overall I'd do most of it again. Except the last one. I bought it at a time that I was in a GOTTA DO ANOTHER DEAL, frame of mind. I had flipped 3 houses in the previous 6 months and made good money on all 3. One of which I'm still collecting on 15 years in.

@Luke H. so the rules have changed since Frank did what he did. Get up to speed on the new and ever changing rules.

There are a few folks in Texas doing own carry. They have a system. If I remember right one of them was on the PB podcast. You might find that with the search feature above. From what I understand, it's not really something you learn via youtube. It's something that you need someone who does it to teach you and hold your hand. If you make one mis-step you could be in big trouble.

The questioner is asking about doing owner financing TODAY, not 20-30 years ago.  Today, there is Dodd-Frank and CFPB.

If investors want to stick to the economic definition of FMV, you will get slaughtered in front of a judge and jury, who hate investors to begin with. Look at comps, another way of deriving FMV, and see if you would buy retail at that number. THAT is what I will crucify you with on the stand, and THAT is what matters.

If you charge a fee to prepare documents, that is the unauthorized practice of law.  There is nothing to debate.  Here is the legal opinion related.  Title companies don't stop you from breaking the law.  They only stop you from doing things causing the title company to break the law.  Just because they allow it, doesn't mean it is legal (or ethical).

And if you think all we do is "fill out forms" you are sadly mistaken.  Your lack of understanding is revealed in the advice you give.

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